FEDERAL COURT OF AUSTRALIA Central Pacific Minerals NL [2002] FCA 239 CORPORATIONS – Scheme of arrangement – three stages to promulgate and give effect to scheme – application, approval of meeting, approval of the Court – basis on which the Court will grant approval – requirements of public policy and commercial morality – absence of oppression – reasonableness – evidence of accountant Corporations Act 2001 (Cth) ss 411(1), 411(4)(b), 411(11), 411(12), 412(1)(a) CENTRAL PACIFIC MINERALS NL (ABN 14 008 460 651) PLAINTIFF N 3014 OF 2001 EMMETT J 27 FEBRUARY 2002 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 3014 OF 2001 CENTRAL PACIFIC MINERALS NL (ABN 14 008 460 651) PLAINTIFF JUDGE: EMMETT J DATE OF ORDER: 27 FEBRUARY 2002 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. the scheme of arrangement between the plaintiff and its ordinary shareholders as set out in the ordinary scheme document annexed to these orders and marked "A" be approved; 2. the scheme of arrangement between the plaintiff and its contributory shareholders as set out in the contributory scheme document annexed to these orders and marked "B" be approved; 3. the scheme of arrangement between the plaintiff and its equity participation shareholders as set out in the equity participation scheme document annexed to these orders and marked "C" be approved; 4. the scheme of arrangement between the plaintiff and its convertible note holders as set out in the convertible notes scheme document annexed to these orders and marked "D" be approved; and 5. pursuant to s 411(12) of the Corporations Act 2001 (Cth), the plaintiff be exempted from compliance with s 411(11) of the Corporations Act, in relation to each of the four schemes approved in Orders 1 to 4. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 3014 OF 2001 CENTRAL PACIFIC MINERALS NL (ABN 14 008 460 651) PLAINTIFF JUDGE: EMMETT J DATE: 27 FEBRUARY 2002 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiff, Central Pacific Minerals NL ("CPM"), seeks orders pursuant to Part 5.1 of the Corporations Act 2001 (Cth) for approval of four schemes of arrangement proposed between CPM, on the one hand, and the holders of four different classes of securities issued by CPM on the other. On 11 December 2001, Hely J made orders pursuant to s 411(1) of the Corporations Act that there be meetings convened of the relevant classes of security holder. Those meetings have now been convened and CPM seeks orders pursuant to s 411(4)(b) of the Corporations Act that schemes be approved by the Court. 2 Section 411(1) relevantly provides that, where an arrangement is proposed between a company and any class of its members, the Court may order a meeting of that class of members to be convened. Where the Court makes such an order, the Court may approve the explanatory memorandum required by paragraph 412(1)(a) to accompany notice of the meeting. 3 Section 411(2) provides that the Court must not make an order pursuant to s 411(1) unless notice of the hearing of the application has been given to the Australian Securities and Investment Commission ("the Commission") and the Court is satisfied that the Commission has had a reasonable opportunity to examine the terms of the proposed arrangement and to make submissions to the Court in relation to the proposed arrangement and the proposed statement explaining the effect of the arrangement and setting out such information as is prescribed, and any other information that is material to the making of a decision by a member of the company. 4 The pivotal provision of Part 5.1 is s 411(4), which provides that an arrangement is binding on a class of members of a company and on the company itself if, and only if, at a meeting convened in accordance with an order of the Court, a resolution in favour of the arrangement is passed: · by a majority in number of the members in that class present and voting, either in person or by proxy, and · by 75 per cent of the votes cast on the resolution; and the arrangement is approved by order of the Court. 5 Under s 411(10), an order of the Court made for the purposes of s 411(4)(b) does not have any effect until an office copy of the order is lodged with the Commission. Upon being so lodged, the order takes effect on and from the date of lodgement, or such earlier date as the Court determines and specifies in the order. Section 411(11) provides that a copy of every order of the Court made for the purposes of s 411(4)(b) must be annexed to every copy of the constitution of the company issued after the order has been made. However, under s 411(12), the Court may exempt a company from compliance with s 411(11). CPM seeks, in addition to orders approving the schemes of arrangement, an order under s 411(12). 6 The statutory framework that I have briefly described indicates that there are three stages involved in the promulgation and giving effect to a scheme of arrangement, such that the scheme will be binding on the parties to it. Those stages are as follows: 1. the application to the Court to convene a meeting; 2. the holding of the meeting to approve the scheme; and 3. the application to the Court for its approval of the scheme. Thus, the Court plays a part in two stages of the process. 7 In the present case the first stage was completed before Hely J. While it is common for the same judge to be involved at both stages, it is not necessary that that be so. The Court will assume that, where a meeting has been convened by the Court pursuant to s 411(1), the appropriate principles for the exercise of the discretion conferred at that stage Court wre adopted and applied. 8 Those principles require that the Court will not convene a meeting unless the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court will be likely to approve the arrangement on the hearing of any application that is unopposed. At the stage of convening a meeting, the Court will give consideration to compliance with such preliminary matters as are relevant to the holding of the meeting. Of paramount importance at that stage is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its details and effect. The Court will also need to be satisfied, at that stage, that there has been reasonable opportunity for the Commission to examine the terms of the arrangement. 9 In exercising its discretion whether to convene a meeting, the Court will have regard to such matters as the acceptability of the documentation of the proposed arrangement, the commercial viability and morality of the arrangement, the likely acceptability of the arrangement, the bona fides of the proposals, whether the proposals could be achieved by another method and any objections or submissions by the Commission. It is always the practice of the Court, at the first stage, to go through the proposed arrangement, to raise matters as to the drafting of the documentation, to ascertain whether the arrangement complies with the substantive requirements of the law and to ensure that the arrangement, if given effect, will not involve any unfair or oppressive result. 10 In considering whether to convene a meeting, the Court will take into account questions of public policy as well as commercial morality. The Court will have regard to the interests of parties who will be bound by the arrangement and who might be careless of their own best interests. While security holders of a company may be considered to be better judges than the Court could be of what is to their commercial advantage, that does not extend to the technical or mechanical aspects of an arrangement. Security holders are likely to be influenced largely by their understanding of the broad economic consequences of an arrangement. However, they are entitled to rely on the Court's approval as a sufficient safeguard against defects at the technical or mechanical level. 11 Accordingly, for the purposes of protecting the interests of security holders who have not agreed to an arrangement and yet will be bound by it, the Court will ordinarily seek to ensure that the terms of the arrangement would be enforceable by all persons bound by it against those who are seeking to implement it or obtain benefits from it. The Court will also seek to ensure that the arrangement does not, without sufficient reason, include provisions that may create inroads upon or modify the benefits that a security holder bound by it might legitimately expect to obtain under it. The mere fact that the Court has convened a meeting does not, however, necessarily mean that the Court will approve the arrangement, even if the arrangement is unopposed at the third stage. 12 In considering whether to approve an arrangement at the third stage, the Court must first be satisfied that the second stage has been fully completed. It must be satisfied that the resolutions have been passed in accordance with the statutory requirements. Secondly, however, the Court must then consider the exercise of its discretion whether to approve the arrangement. While the primary task of the Court is to see that the procedure whereby the arrangement has been approved by security holders is formally correct, it has the further duty of satisfying itself that the arrangement is fair and equitable between different classes of security holders, and as between security holders and those who will benefit from it. 13 The jurisdiction of the Court in relation to an arrangement is supervisory, in the sense that the Court is concerned to be satisfied that there has been an absence of oppression and that the arrangement is one that is capable of being accepted. For example, the Court will withhold its approval where a majority is shown to be acting in bad faith or where a majority's acceptance is in the nature of a fraud on the minority. The Court will, of course, generally take the view that the shareholders are the best judges of whether an arrangement is to their commercial advantage and will be reluctant to make decisions contrary to the views of security holders expressed at meetings. The function of the Court does not extend to usurping the views of the relevant security holders. 14 Nevertheless, the Court is not a mere rubber stamp and it will look at the arrangement to ensure that it is a reasonable one. If the Court concludes that there is an objection to the arrangement, such that a reasonable person might not approve it, then the Court may refuse to approve the arrangement. The Court must be satisfied that the proposal is at least so fair and reasonable that an intelligent and honest person, who is a member of the class of security holders bound by the arrangement acting alone in respect of his or her interests, as such security holder, might approve it. 15 It is against those principles that I must consider the two questions that are now presented to the Court. The first is, whether the procedural requirements of the order made by Hely J have been satisfied. The second is, assuming that the pre-conditions of s 411(11)(4)(a) are satisfied, whether the four schemes of arrangements should be approved. 16 Each of the four schemes is between CPM on the one hand and a class of security holder on the other, being: · ordinary shareholders; · contributory shareholders; · equity participation shareholders; and · convertible note holders. The schemes are part of a proposal to combine two listed entities, being CPM on the one hand and Southern Pacific Petroleum NL ("SPP"), on the other. The result will be that there is but one publicly listed company, being SPP, which will be the holding company of CPM. The schemes involve the acquisition of securities issued by CPM in consideration of the issue to the holders of those securities of securities in SPP of an equivalent class. The schemes will result in SPP owning at least 80 per cent of CPM's voting shares. 17 I have considered the affidavit evidence filed on behalf of CPM in support of the application for approval of the schemes. I am satisfied from those affidavits that, subject to one matter, meetings were convened pursuant to and in accordance with the orders made by Hely J on 11 December 2001. However, senior counsel for CPM has drawn my attention to one matter in relation to the holding of the meetings that may be regarded as a departure from strict compliance with the orders made by Hely J. 18 Hely J ordered that meetings of the four different classes of security holders be held on 24 January 2002 at 10.15am, 11am, 11.20am and 11.40am respectively. However, in the documentation sent to security holders, including the formal notices of meeting, security holders were told that, while the meeting in relation to the scheme for ordinary shareholders would commence at 10.15am, the other three meetings would commence at the time specified, or as soon as the previous meeting concluded or was adjourned. I am satisfied that there is no prejudice likely to any security holder by reason of that departure, insofar as it was a departure from orders made by Hely J. 19 I am satisfied that the prerequisites contained in s 411(4)(a) have been satisfied and that each scheme of arrangement has been approved by the requisite majority of security holders that will be bound by that scheme. However, before deciding whether to approve the schemes, it is necessary to consider the schemes and the reasons for promulgating them. 20 SPP and CPM are both presently engaged in the development of the shale oil industry in Australia. SPP and CPM together have interests in ten shale oil deposits located in central Queensland, which contain a very substantial resource of shale oil. SPP and CPM jointly commenced exploration for shale oil in 1973. The research and exploration techniques adopted by SPP and CPM led to the initial discovery of deposits in Queensland in 1974 and a further deposit in 1977. Following further discoveries and more recent acquisitions, SPP and CPM currently hold joint title to 10 Australian shale oil deposits of significant size. 21 In 1968, when CPM and SPP were first formed, a tax regime existed in Australia that treated companies differently for tax purposes according to whether they were petroleum or mineral exploration companies. Since the founders of the two companies intended to undertake both petroleum and mineral exploration, they formed two separate companies to take best advantage of the tax regime. Accordingly, SPP was formed to pursue petroleum exploration and development and CPM was formed to pursue mineral exploration and development. A cross-shareholding was established with the objective of diversifying and sharing the risks and benefits of exploration failures and successes between the shareholders of each company. 22 Both companies made initial public offerings and were listed on the Australian Stock Exchange ("ASX") in 1968. However, in 1972, the differential tax regime was removed. Nevertheless, when the companies decided to become actively involved in the development of oil in Australia in 1973, SPP and CPM agreed that, as the industry embraced both mining and oil technology, any interests that either of them acquired would be taken up on a 50:50 basis between them. 23 Although CPM and SPP are separate companies, they are effectively operated and managed as a single entity. CPM and SPP have the same board of directors, management and facilities and they own all their significant assets on a 50:50 basis. At present, CPM owns approximately 30.7per cent of SPPs issued capital, and SPP owns approximately 34.5 per cent of CPMs issued capital. The two companies have been run in a manner that ensures that revenue, expenditure, capital, assets and liabilities are allocated as closely as possible on a 50:50 basis. 24 The managerial focus facilitated by identical boards has ensured that the two separate companies do everything within their means to ensure that they operate practically as one entity. The implementation of the schemes of arrangement is intended to simplify the structure of the two companies by removing the cross-shareholding. If the schemes are approved, each of the existing securities in CPM, other than convertible notes, will be exchanged for 2.664 securities in SPP of an equivalent class. 25 However, each holder of convertible notes will continue to hold convertible notes. Pursuant to the scheme relating to convertible notes, the terms of the convertible notes will be amended so that the convertible notes will be convertible into SPP shares rather than CPM shares, again at the ratio of 2.664 SPP shares for each CPM share that would have been issued upon conversion. 26 The schemes entail the delisting of CPM, the removal of the shareholding held by CPM in SPP and an option for security holders to defer participation in the relevant scheme for up to 10 years. That option is available for up to a maximum of 20 per cent of shares. An amendment of SPP's constitution is proposed so that, for 2 years from the implementation date as defined in the schemes, the maximum shareholding in SPP of any person will be limited to 20 per cent. 27 The schemes are expressed to be subject to certain conditions precedent. The schemes relating to contributing shares, equity participation shares and convertible notes are conditional upon approval of the scheme relating to ordinary shares. Otherwise the conditions precedent are equivalent. I am satisfied that, apart from the condition as to approval by the Court, the conditions precedent have been satisfied. 28 The securities in SPP that will be issued as consideration are subject to the Securities Act 1933 (U.S.). However, s 3(a)(10) of the Securities Act 1933, contains certain exemptions from compliance with that Act. The relevant requirement for the exemption for any security that is issued and exchanged for bona fide securities, is that the terms and conditions of such issuance and exchange have been approved by a court after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange have had the right to appear. 29 One of the requirements for the operation of s 3(a)(10) is that the proposed issuer of securities in respect of which the exemption is to be claimed must advise the court whose order will be relied upon, that the issuer will rely on s 3(a)(10) on the basis of the court's approval. That requirement has been satisfied. 30 The evidence before me indicates that for the exemption to be effective, the court in question must have sufficient information before it to determine the value of both the securities to be surrendered and the securities to be issued in the proposed transaction. The exemption will be available only if the court in question both holds a hearing to determine whether the proposed terms and conditions are fair to all those who will receive securities in the exchange and to approve the fairness of the terms and conditions of the proposed exchange. Such a hearing must be open to everyone to whom securities would be issued in the proposed exchange and notice of the hearing in appropriate terms must be provided in a timely manner. 31 It is not for this Court to express any view as to whether the procedures or processes of the Court are sufficient to satisfy the requirements of the exemption in s 3(a)(10). However, it is clear that, on the hearing of an application for an order approving an arrangement under s 411)(4)(b) of the Corporations Act, any security holder is entitled to be heard. The application for approval takes place in open court after formal notification and advertisement in daily newspapers circulating in Australia. Applications for approval may be opposed and indeed, there are instances of approval being refused in the light of opposition and submissions advanced at a hearing at the third stage to which I have referred. 32 Hely J, when convening the meetings, had before him evidence from Mr Steve Scudemore, a director of KPMG Corporate Finance Aust Pty Limited and a partner of the accounting firm KPMG. That evidence consisted of a sworn report of 16 November 2001. The report was prepared in order to provide an opinion as to whether the schemes are in the best interests of the persons who will be bound by them. It was prepared for inclusion in the information memorandum required under Part 5.1 of the Corporations Act. The basis of the evaluation as to whether each of the schemes was in the best interests of the scheme participants was an assessment as to whether those participants are likely to be better off if the relevant scheme proceeds then if the particular scheme does not. CPM also relies on that evidence in its application to me for approval of the schemes. 33 The report referred to a number of factors, as follows: 1. The exchange ratio of 2.664 is fair, since it represents the ratio of the interests of shareholdings per share in the underlying net assets, after eliminating the impact of cross-shareholdings. 2. The 47.6 per cent share of SPP that will be held by CPM security holders is consistent with the proportion of value that will be contributed by CPM to the newly merged SPP group. 3. The market for SPP ordinary shares after the merger can reasonably be expected to be more liquid than the current market for CPM ordinary shares. 4. The elimination of cross-shareholding removes an inhibition against making a takeover bid for SPP or CPM thus making a potential takeover bid more likely. Given the investment and progress of the companies since November 2001, the directors believe that SPP and CPM are currently vulnerable to an inappropriately priced offer. For that reason, the schemes are subject to the condition precedent that the maximum shareholding of any person in SPP will be limited to 20 per cent for 2 years. 5. The CPM shares of holders of ordinary shares who elect to defer the transfer of their ordinary shares will cease to be listed on ASX. 6. After two years, there will be increased vulnerability to an inappropriately priced takeover offer. 7. There will be an additional amortisation charge on the merger of the two companies. 8. There will be some remaining complexity during the deferral mechanism, which is likely to result in minority shareholders in CPM for up to 10 years. 9. There will be implementation costs involved in giving effect to the schemes. 10. The exchange ratio is not designed to provide a premium for control for CPM security holders. 11. There are various taxation considerations that may or may not have a positive or negative effect. 34 After considering each of those factors, Mr Scudemore expresses the opinion that each of the schemes is in the best interests of the holders of the particular securities. Having regard to the evidence of Mr Scudemore, and to the absence of any opposition to the application made today, I am satisfied that the Court should make orders as sought in the application. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 12 March 2002 Counsel for the Plaintiff: Mr Oakes SC Solicitor for the Plaintiff: Allens Arthur Robinson Date of Hearing: 27 February 2002 Date of Judgment: 27 February 2002